Brownfield land in the UK: environmental indemnities

by Reed Smith
Contact

Introduction

In this second in our series of briefings on topics relevant to those involved in brownfield land, we focus on environmental indemnities.

These are perhaps most commonly encountered in an M&A context, but environmental indemnities are also frequently found in leases, storage agreements, service contracts and all manner of other contractual contexts where the nature of the relevant land, or past, present or future activities in question, carry environmental (particularly clean-up) risk.

Indemnities are obviously a standard mechanism for allocating risk in many areas of legal practice. However, there are various specific legal and practical issues that always need to be – but too often are not – borne in mind when drafting and negotiating any form of indemnity covering environmental risks. In this article we highlight just a few examples of issues to watch for.

Getting the basics right

There really is no such thing as a “standard environmental indemnity” (although it is a common enough request!).

Every site and every deal is different and, in our experience, significant time and cost is likely to be wasted if the parties do not take the trouble to work out the key “heads of terms” of an environmental indemnity before detailed drafting commences.

The commercial team might tell you that the other side has agreed to give an indemnity for historic environmental risks, “so please draft something up”; but what have the other side really agreed to cover?

  • All historic contamination at or under the site(s)?
  • “Known” and/or “unknown” contamination (of any type)?
  • Perhaps just contamination caused during the seller’s period of occupation, or just particular “hot spots”?
  • What about contamination that has already migrated off-site onto third-party land prior to completion or vice versa: is that risk covered?
  • Does it apply to all sites in the deal or just some of them? In a share deal, what about former sites (see further below)?
  • What risks are covered: mandated clean-up, clean-up that a reasonable and prudent operator would perform even if not mandated, voluntary clean-up, clean-up necessitated by the buyer’s future redevelopment of the site (see below), etc.?
  • Should contamination and associated obligations be determined under the law as it stands now, or as it stands when a compliance obligation is triggered? Does this include laws relating to human health and safety or town and country planning?
  • What about capital expenditure costs to bring plant and equipment into compliance with environmental law?
  • How long will the indemnity last?
  • What will the financial limits of cover be, the level of excess (and when reached, are claims paid from the ground up?) and other financial limits, and how do these interact with other warranty and indemnity cover in the SPA (if applicable)?

Environmental law is one of the most rapidly developing areas of legal practice today, and therefore one where the danger of over-reliance on previous “precedent” wording is particularly acute. Keeping up to date is therefore crucial.

For example, an indemnity precedent dating from before 2009 (and certainly before 2007) is very likely to take no account of the potentially significant changes to domestic legislation brought about by the EU Environmental Liability Directive: e.g., in terms of how the “Environment” is defined, the types of physical remedial works that can now be required, and the situations in which those works may have to be performed proactively without waiting for regulatory order.

Taking a holistic approach is also vital. All too often we see wording that focusses exclusively on regulatory requirements, but ignores the possibility that pollution liabilities can also arise at common law (e.g., claims in tort by neighbouring landowners) and in contract (relevant in share deals where the buyer acquires the corporate entity that owns the land in question, and not just the land itself).

If the buyer’s intention is, or might be, to sell on the land again in the short term (i.e., before the term of the indemnity expires), or use it as security for financing, does the indemnity contain adequate assignment rights or, alternatively, rights to provide back-to-back indemnities and, if so, do such rights “work” from a drafting perspective alongside any change-in-control provisions, the definitions of the indemnified party, and so on.

These are just some of the basic questions that need to be addressed at the outset.

Former sites

Given that much of environmental law works on the “polluter pays” principle, former sites are a vitally important issue in transactions involving the buying or selling of a company’s shares (as opposed to purely its assets).

There is a natural tendency to focus in due diligence on the existing real estate and other assets of a target company. However, the case may well be that greater actual or potential environmental liabilities lurk within the target’s portfolio of formerly owned, leased or used land (about which, of course, much less is likely to be known).

This is particularly so given that modern levels of environmental stewardship are a comparatively recent (particularly post-1990) phenomenon. Land that a target company owned or used many decades ago may well have been subject to extensive contamination simply as a result of the then-prevailing industry standards (or lack thereof).

If the company you are acquiring has a long history, it is conceivable that in the process of acquiring what now appears to be a well-run and environmentally benign business, you are stepping into a raft of historic environmental problems.

Former sites also carry more risk in the sense that there will typically be less information available (or at least less up-to-date information) about current ground conditions and, in addition, the acquiring company will not gain control of the site at closing, and therefore generally will not be able to mitigate future risk (by cleaning it up, putting in place boundary protection measures, instituting a monitoring regime or the like).

Specific provisions – including but not limited to longer time periods and higher financial limits – may need to be included in any environmental indemnity to cover liabilities associated with former sites.

Trigger conditions

Obviously the ideal indemnity from the point of view of the indemnified party will be very simple, responding to any and all losses sustained under environmental law and/or in connection with environmental matters.

However, well-advised indemnifying parties will not agree to this and will instead seek to agree a regime whereby, rather than simply writing the proverbial “blank cheque”, the indemnity will only kick in if defined “trigger” events occur (for example, if liability is established by a court, or if a regulator imposes a clean-up obligation).

If unexpected surprises in the cover given or received are to be avoided, agreeing triggers requires a clear understanding of not just prevailing environmental laws, but also how they are enforced in practice and how that might change in the reasonably foreseeable future.

For example, we see far too much drafting circulating in the market that only looks at risk through a “Part IIA” (contaminated land regime) lens. This ignores (or has not caught up with) the changes to English environmental law brought about by implementation of the EU Environmental Liability Directive 2004, which in certain cases has introduced duties (so-called “self-executing provisions”) to carry out extensive remediation without any clean-up notice being served or other regulatory action taken.

Whose contamination?

This is a particular issue in the context of property that has been used for the same purpose (for example, a petrol filling station) for many years despite periodic changes of the occupier and/or where the new owner will continue the same use.

If gradual pollution occurs year on year by the same type of pollutants (for example, hydrocarbons), how do you prove who caused what? Depending on who bears the burden of proof and what evidence exists, this practical issue can be a major problem in environmental indemnity claims, so it is an issue that is best addressed upfront to the extent possible.

One approach is to expressly allocate the burden of proof and the risk of uncertainty in the legal drafting, but this is not straightforward and is likely to be controversial (the sort of issue parties tend to prefer to “kick down the road”). Another option is to conduct a baseline survey (whether on an agreed basis or independently of the other side), but there are important legal and practical downsides and complex tactical considerations in doing so. A future article in this series will look at baseline surveys in more detail.

Post-completion conduct limitations

From the perspective of the party receiving the indemnity, there would ideally be no conduct limitations at all. A one-paragraph indemnity may well be ideal for the indemnitee. In practice, the vast bulk of the drafting in a specialist environmental indemnity is there to protect the paying party and spell out what is not covered. A key part of this is post-completion conduct limitations.

There is no “one size fits all” solution. Negotiating the right conduct limitations (whether you are acting for the party giving or receiving the indemnity) requires a successful marriage of specialist knowledge of environmental law and practice, with a clear understanding of both existing and potential site conditions, and the activities to be undertaken there.

For example, it is common to include a carve-out for losses triggered or exacerbated by the buyer’s voluntary post-completion drilling/digging. However, certain environmental laws will require intrusive surveys of ground conditions to be carried out (and require discovered contamination to be cleaned up) as a condition of obtaining or surrendering key environmental permits, without which the client’s business cannot be operated. The same is true for works required (e.g., under planning laws) as part of future site redevelopment/extension.

Unless future site plans are thought about, and specialist advice taken on associated future regulatory requirements, standard/innocuous limitations in indemnity cover could produce unexpected results.

Other potential traps (for either side) include whether disclosure of information to regulators post-completion is permitted (the risk of “tipping off” versus the need to comply with mandatory “whistle-blowing” duties, or to protect corporate reputation), and how the indemnity responds to clean-up or other loss triggered by closure or decommissioning of sites, or parts of sites, variations of permits, sales or changes of occupier. Additionally, to what standard of remedial works shall the indemnity apply (is there a risk of goldplating the works?).

These are all examples of the need for the lawyer and client to focus as much on the future of a contaminated site as its past when negotiating contractual allocations of risk. Generally speaking, of course, the client will have a clear idea of its future plans, but it may be less aware of how forthcoming developments in the constantly evolving area of environmental law might impact those plans. A proper two-way dialogue, preferably done at the outset of negotiations, can avoid unnecessary pitfalls.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Reed Smith | Attorney Advertising

Written by:

Reed Smith
Contact
more
less

Reed Smith on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.